Wednesday, August 4, 2010

You are a believer, born again and yet you hear voices and you are possessed.

Okay. Are you ready [unintelligible] ?Ha ha ha ha ha ha.

— Unidentified exorcist, New York, 19801

Consider, Gentle Readers, a simple game:

It is an auction, with any number of participants, the object of which is to win a single, unadorned one hundred dollar bill. If you win the auction, you get to keep the money. (No tricks, I promise.) Bidding starts at a minimum of one dollar, and topping bids must exceed the prior bid by no less than one dollar, in even, undivided dollars. There is only one additional rule: the runner up in the auction must pay his or her last bid to the auctioneer, as well as the winner paying the winning bid. So, for example, if the winning bid is $10, and the next highest bid is $9, the winner will pay $10 and collect the hundred dollar bill, and the runner up will pay $9 and receive nothing.2

So, here we go. I am holding in my hands a crisp, new, freshly-issued one hundred dollar bill. Genuine U.S. currency, guaranteed legal tender for all debts, public and private. The opening bid is one dollar. Only one measly dollar to walk away with a crisp new hundo. Who will start the bidding?

* * *

I wonder how many of you raised your virtual hands. Contrariwise, I wonder how many of you recognized the trap for what it is: a slight variant of Martin Shubik's rational choice theory experiment, the Dollar Auction.

It is an odd sort of game, but one which leads to all sorts of interesting outcomes and associated implications. For some of you may have realized that once you make a bid, you are committed to a losing escalation. Sure, at the beginning, the prospect of winning $100 for a bid of $1, or outbidding a competitor to win it for $10, sets your rational utility-maximizing (i.e., greed) glands salivating. Eventually, however, you realize that you are trapped in a losing battle. If another person bids $50, you or someone else have to bid $51; otherwise, you will spend $49 and get nothing. All of a sudden the prospect of a risk-free gain of $51 begins to look like an unavoidable loss of $49. Surely you should just bid $51 yourself, right? But then your equally rational competing bidder does the same, and you are back to the races. Sadly, the escalation doesn't even stop once the high bidder reaches $100, the true value of the bill at auction. For then the underbidder faces the prospect of either bidding $101, and losing a dollar, or not counterbidding and losing $99.

Depending on how loss-averse the participants are, or how much utility they derive from inflicting greater losses on their competitor than they suffer themselves, there is no theoretical upper limit to how high bidding can go.

I have seen this auction played out in an academic setting in front of a diverse group of businesspeople for a $20 bill. The winning bid?: $50, before the business school professor running the auction took pity on the bidders and cancelled the experiment. This same professor later told us he had run a dollar auction like mine for $100 among a group of hardened, financially savvy investment bankers. The result there?: $1,000 and counting, before he cut it off. Apparently, some of the bankers in the room became truly incensed when they were not allowed to continue their mutually assured destruction.

In fact, one of the only ways to participate in such an auction and win is to bid first and not face a counterbid. In other words, you can win if you are by far and away the most aggressive, greedy, competitive, and stupid of the auction participants. (For if you are not stupid, you will think through the situation and realize that bidding second puts you at the mercy of the idiot who bid first, with no clear loss limit in sight. The only reason you might bid is if you refuse to allow the stupid guy to walk away with $99 worth of risk-free profit. But that can be a rather pyrrhic lesson to teach.)

* * *

Now I share this thought experiment with you, Dear Readers, because I think it illustrates an illuminating dynamic in many competitive socioeconomic situations. The dollar auction is simplified, and simplistic, but the win-at-all-costs motivation behind it can be witnessed in human activities as widespread and diverse as mergers and acquisitions, proprietary trading, simple auctions, and herding behaviors of all kinds. Even, I would argue, in the winner-take-all competitions of the human heart.

What is the solution? I have no fucking clue.

Greed is a mercurial and Protean thing. So is fear. Bottle them up in one part of the human psyche, and they will only reemerge in different form elsewhere.

The principle of exorcism is simple: an exorcist suitably skilled can expel an evil spirit from the victim it possesses, but he cannot destroy that spirit. That, presumably, is for God alone to accomplish.

* * *

Come out, grief! Come out, destruction!

Ha ha ha ha ha ha ...

1 As sampled by Brian Eno and David Byrne in "The Jezebel Spirit," from My Life in the Bush of Ghosts. Listen to it. It will spook the crap out of you. Highly recommended.2 For you cleverboots, there is another rule: no bidding consortia. You're in this one alone.